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OVERLAND PARK, KS-Applebee’s International Inc.’sprofit declined 2.2% to $27.5 million, or 34 per centsper diluted share, for the second quarter from $28.1million, or 33 cents per diluted share, for sameperiod last year. Net earnings were impacted by a $2.3million pre-tax inventory impairment charge and higherthan expected operational expenses related to storeopenings.

“These results are not acceptable to us,” saidApplebee’s chairman and CEO Lloyd Hill during thechain’s earnings conference call. He reassuredinvestors that the management team “is not sitting onits hands” and is working to improve the performanceof the chain.

The chain posted a slight increase in system-widecomparable sales for the second quarter of 1.6%, which represents the 28th consecutive quarter of comparable sales growth. Comparable sales for company restaurants decreased 1.2% and franchise restaurant comparable sales increased 2.5% for the quarter.

During the call, Applebee’s also reported system-wide comparable sales for July 2005 increased 1.6% percent for the July period, and comparable sales for franchise restaurants increased 2.3%.

During the second quarter, 30 new Applebee’srestaurants opened system-wide, including 14 companyand 16 franchised restaurants, bringing the totalnumber of locations to 1,722 restaurants. “We remaincommitted that 2005 is a year of significantinvestment,” said David Goebel, president and COO. “Wecould call it short-term pain for long-term gain.”

The chain said that pre-opening expense is expected tobe higher as a result of the increase in the number ofcompany openings from 32 in 2004 to at least 50 in2005. More than 135 new restaurants are expected toopen in 2005, including at least 50 company and 85franchise restaurants. Roughly 12 company restaurantsare expected to open in the third quarter, with thebalance opening in the fourth quarter of the year. Approximately 20 to 25 franchise restaurants are expected to open in the third quarter, with the remainder opening in the fourth quarter.

Excluding the cost of franchise acquisitions, capital expenditures are now expected to be between $150 and $160 million in 2005, including the anticipated costs of re-opening seven restaurants in Memphis. “We are building a big (development) pipeline for’06,” Goebel noted.

The chain reaffirmed its earnings guidance for 2005,putting its diluted net earnings per share in therange of $1.44 to $1.47, with third quarter dilutednet earnings per share expected to be in the range of37 cents to 39 cents.

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